Wednesday, December 21, 2016

Inflation, Economic Multipliers, and Syria

I was a little distressed to see an anti-war friend of mine posting rhetorical defenses of Bashar al-Assad, essentially arguing that Assad hadn't done anything unjustified in the war on Syria.  I don't want to dwell at that at length.  Suffice it to say: one's opposition to imperial entanglements shouldn't include the enemy of my enemy is my friend moral calculations to let people who authorize this sort of behavior off the hook.  The article linked-to is long but worth a read if you like to be depressed.

Anyways, today I wanted to mostly touch on what Dean Baker and Paul Krugman were saying.  Let's start with Dean Baker, who has an informative take on inflation in which he rips a new one to the Chair of the San Francisco Fed.

The Fed recently voted to raise interest rates, thus increasing borrowing costs in the economy, thus slowing business down, thus fighting inflation.  You're not really supposed to slow the economy down unless you're at near full employment, i.e., everyone who wants a job has got a job.  Emphases added mine throughout:

We have numerous pieces raising serious questions about whether the labor market is really at full employment, noting for example the sharp drop in employment rates (for all groups) from pre-recession levels and the high rate of involuntary part-time employment.

So right off the bat, not everyone who wants a job has got a job (at least not a full-time job).  So how's inflation lookin'?

A close look at the data does not provide much evidence of accelerating inflation. The core PCE deflator, the Fed's main measure of inflation, has risen 1.7 percent over the last year, which is still under the 2.0 percent target. This target is an average, which means that the Fed should be prepared to allow the inflation rate to rise somewhat above 2.0 percent, with the idea that inflation will drop in the next recession.

Anyhow, the 1.7 percent rate is slightly higher than a low of 1.3 percent reached in the third quarter of 2015, but it is exactly the same as the rate we saw in the third quarter of 2014. In other words, there has been zero acceleration in the rate of inflation over the last two years.

Furthermore, even this modest acceleration has been entirely due to the more rapid increase in rent over the last two years. The inflation rate in the core consumer price index, stripped of its shelter component, actually has been falling slightly over the last year. It now stands at 1.1 percent over the last year.

It is reasonable to pull shelter out of the CPI because rents do not follow the same dynamic as most goods and services. In fact, higher interest rates, by reducing construction, are likely to increase the pace of increase in rents rather than reduce them.

Hey! Well! If you're a fan of people being hired and salaries/wages going up, that all sounds... uh, well, kind of bad! 

(And, of course, Baker makes clear that those folks who are likely to be left behind in the job market when the Fed's increase in rates slow the economy are likely to be predominantly African-American and Hispanic.  Who could've guessed?)

But, hey, ok.  Trump is coming into office, and he's got this big infrastructure plan to roll out!  That'll be expansionary, and make up for the hikes in interest rates, surely.  Oh... but what if it resembles previous Republican budgets?

I was able to find matching analyses by the good folks at CBPP of tax and spending cuts in [Speaker of the House] Paul Ryan’s 2014 budget, which may be a useful model of things to come.

If you leave out the magic asterisks — closing of unspecified tax loopholes — that budget was a deficit-hiker: $5.7 trillion in tax cuts over 10 years, versus $5 trillion in spending cuts. The spending cuts involved cuts in discretionary spending plus huge cuts in programs that serve the poor and middle class; the tax cuts were, of course, very targeted on high incomes. 

The pluses and minuses here would have quite different effects on demand. Cutting taxes on high incomes probably has a low multiplier: the wealthy are unlikely to be cash-constrained, and will save a large part of their windfall. Cutting discretionary spending has a large multiplier, because it directly cuts government purchases of goods and services; cutting programs for the poor probably has a pretty high multiplier too, because it reduces the income of many people who are living more or less hand to mouth.

Taking all this into account, that old Ryan plan would almost surely have been contractionary, not expansionary.

Well, rest assured Donald Trump is his own man, will buck GOP orthodoxy and introduce a genuinely expansionary budget that will lift the middle class out of its malaise and Make America Great Again.


No comments:

Post a Comment